COVID19 is a menacing matador

Malavan Ragulojan, c2022

This article was written on March 15th, 2020

What a week for global markets.

On March 14th, the longest bull market run in American history finally came to a dramatic close as the WHO declared COVID19 a pandemic on March 11th, and President Trump announced the virus to be a national emergency. Whether the market boom enthusiasm that the Donald hoped would define his presidency and earn him a second term succumbs to panic and disenchantment will depend on his management of the next few months. Business is certainly not one to wait and see with such a capricious President though; uncertainty, more than anything else, tends to decimate investor confidence and encourage selling in a desperate attempt to recuperate losses before it is too late. Stocks act as a barometer for consumer confidence, and if this drop means anything at all, it is that the economy has entered a significant state of flux without a foreseeable end. One of the notable consequences of the COVID19 has been the collapse in global markets, which goes to show that the health of a nation has wide-reaching repercussions beyond merely the hospital.

Such a state of decline is known as a bear market, named for how a bear is sluggish and hibernates, swiping down when confronted with a threat. The market will be dominated by pessimism, with investors selling their stocks to recuperate their earnings before further losses are incurred. Bull markets are defined by optimism and buying with confidence in the future growth of the business, with rising stocks akin to how a bull swipes its horns upward on the attack. These changes act as a proxy of the overall state of the economy, following states of contraction and expansion of the total output of the nation respectively as demonstrated below.

global markets

One of the major goals of fiscal (changes in spending and taxation by the government) and monetary (actions undertaken by the central bank to control money supply) policy are to calm the extremes of the business cycle to ensure a sustainable rate of growth. As seen in Figure 1, the overall state of the economy, as measured through total output, tends to lag behind the stock market cycle. Investors are emboldened by bull markets to channel funds into the growth of business, resulting in a rise in national economic output. In contrast, bear markets lead investors to panic and sell their shares, shrinking business.

Why exactly are investors so wary of COVID-19? Both (well justified) encouragement of social distancing by governments, in addition to frank fear amongst consumers, substantially dwindles consumer demand. In economics like Canada and the United States, which are primarily service orientated, the brunt is especially salient. Restaurants are reporting a swift fall in business by as much as 60%, and many are temporarily shutting down and furloughing employees. Airlines have reported declines in flight booking of up to 40%, surpassing even the panic following 9/11.

Personal Consumption makes up about 70% of economic output, and the grocery stores, malls, tourism, and other industries that all contribute to the consumer spending are descending into the abyss of financial despair. Dwindling consumption leads to a paralysis of production, which in turn eliminates the need for transporting goods and slashes the demand for oil. In the midst of a violent trade war between Saudi Arabia and Russia, which each vowing to outproduce the other, oil prices will probably fall dramatically and into the teens. Neither Canadian or American oil supplies would be able to sustain themselves for an extended period of time at a price of below $40, and oil is already trading at $33 a barrel at the time of writing. Reduced spending in so many industries means shriveling corporate profits, which in turn prompts investors to sell their shares before the value of the company falls too dramatically.

It is far beyond the scope of this column to meander into the forays of recession theory and deliberate about the validity of John Maynard Keynes’s perspective of aggregate demand, or Friedreich Hayek’s model of liquidation, that recessions are crucial to restructure the economy. Whether government stimulus would be justified in such a situation is inconsequential to investors; what matters is that it failed to immediately materialize two weeks ago, and so when investors lost confidence in the market, we witnessed on Wednesday the largest rout in markets since Black Monday in 1987.

How much of this will be reflected in the real economy remains uncertain. Donald Trump ended up declaring last Friday that he would indeed initiate a set of demand side-oriented policies, including wide-reaching stimulus packages and lowering taxes, though whether the Republican establishment would agree to the full extent of such an endeavour is uncertain. The Bank of Canada has already acted, cutting interest rates in half, freeing up reserves of about 300 billion in loans, and offering 10 billion of credit, all in an attempt to stimulate aggregate demand. Other nations in Europe are acting swiftly with similar policies as well. Without further gauging the effects of COVID19, it will be impossible to ascertain for sure the right approach to dealing with this crisis economically.

The COVID19 pandemic represents what is truly a black swan; an event that no one could have predicted, but what will soon be regarded as having been obvious in hindsight. Unlike the obscurity of financial securities and real estate that precipitated the 2008 recession (and which every layperson who watched the Big Short will pretend like they understand), this new downturn in the market, and potential recession will highlight the very real impact that the health of a nation– no the world, has on the global economy. Businesses and corporations are made up of people after all, and when these people are sick, the economy becomes sick. COVID19 will not mean the apocalypse. In several months, the disease will likely be controlled, and consumer confidence will return. Yet, the experience will clearly demonstrate how addressing the public health of a nation is a task with wide-reaching ramifications throughout society. With longer-term chronic trends like an aging population and antibiotic resistance just around the corner, hopefully, legislators will understand these issues are just as pressing for economic growth as the monthly interest rate when they are faced with the acute crisis of COVID19.…0.0..0.121.1153.10j3……0….1..gws-wiz-img…….0i67j0i8i30j0i24.tMd42rP-FRA&ei=z3ZtXvPRNKOXtgWbrZmABA&rlz=1C1OCLT_enCA766CA766#imgrc=xyTWtHJ9Du9sAM

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